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MacKenzie Manufacturing purchased equipment for $160,000. In addition, shipping charges of $2,000 were incurred to obtain the equipment. The company paid $12,500 to construct a foundation and install the equipment. The equipment is estimated to have a residual value of $15,000 at the end of its 5-year useful life. Using the straight-line method, what is the amount of depreciation expense each year?

(A) $34,900
(B) $34,500
(C) $29,900
(D) $31,900

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Answer:

The amount of depreciation expense each year is (D) $31,900

Explanation:

Total cost of the equipment = Purchased cost + Shipping charges + foundation and install fee = $160,000 + $2,000 + $12,500 = $174,500

MacKenzie Manufacturing use the straight-line method, Depreciation Expense each year is calculated by following formula:  

Annual Depreciation Expense = (Cost of the equipment − Residual Value )/Useful Life = ($174,500 - $15,000)/5 = $159,500/5 = $31,900